Rand report: CPI review and SARB rates decision preview

Key Takeaways:

1. The South African Reserve Bank (SARB) is expected to maintain its current interest rate stance following the US Federal Reserve Bank's decision to pause its interest rate hike cycle and the deceleration of inflation. This decision will be made by the Monetary Policy Committee (MPC) of South Africa on July 20.
2. Inflation in South Africa is finally within the target range of 3-6% year-on-year, with the latest Consumer Price Index (CPI) data showing a decrease in June 2023. This indicates a slow but steady economic resurgence in the country.
3. Sectors such as food and non-alcoholic beverages, housing and utilities, and miscellaneous goods and services were the primary contributors to the annual inflation rate of 5.4%. The food and non-alcoholic beverages sector, in particular, observed a significant increase of 11.0% year-on-year.
4. The inflation rate of goods and services in June showed signs of a slowdown, with the annual inflation rate of goods decreasing from 8.0% in May to 6.3% and the inflation rate of services decreasing from 4.6% in May to 4.5%. This suggests a potential stabilization in the economy.
5. The decisions of the South African Reserve Bank in the coming months will be crucial for the country's economic stability, as they need to balance maintaining a steady interest rate and managing inflation. The impact of the US interest rate cycle on rand depreciation and the risks for the inflation outlook will also be significant factors to consider.

When is the SARB rates decision and will they raise rates again?

The South African Reserve Bank (SARB) is expected to hold its steady stance on interest rates this month, following the US Federal Reserve Bank's decision to pause its interest rate hike cycle and the deceleration of inflation. This decision will be made by the Monetary Policy Committee (MPC) of South Africa on July 20.

Local inflation starts to steady

South Africa has elevated its interest rates by 4.75% in the current cycle. However, the latest Consumer Price Index (CPI) inflation data indicates that inflation is finally within the target range of 3-6% year-on-year for the country. The headline CPI for all urban areas saw a decrease in June 2023, with an annual consumer price inflation of 5.4%, down from 6.3% in May 2023. This demonstrates a slow but steady economic resurgence in South Africa.

The primary contributors to the 5.4% annual inflation rate were sectors such as food and non-alcoholic beverages, housing and utilities, and miscellaneous goods and services. The food and non-alcoholic beverages sector, for instance, observed an 11.0% year-on-year increase, adding 1.9 percentage points to the inflation rate.

In June, the annual inflation rate of goods was 6.3%, down from 8.0% in May, while for services, it was 4.5%, down from 4.6% in May. These numbers project a potential stabilization in the economy, with the inflation rate of goods and services showing signs of a slowdown.

Inflation and SARB rates outlook

The SARB's inflation-targeting approach is forward-looking. The bank endeavours to influence future inflation outcomes via its monetary policy targeting framework, focusing its vision on a few months to over a year's time, particularly 2024.

From September, CPI inflation is expected to rise back up from 4.5% y/y to 5.0% y/y and then stabilize near this rate over Q423. The SARB needs a pause in its interest rate hike cycle to assess the impact on both inflation and the economy due to the three to four quarter lag between the impact of interest rates on the economy and inflation.

Financial instability among consumers has surged due to distress borrowing. At the same time, salary and wage increases are failing to keep pace with inflation in South Africa, which curtails consumer demand and demand-led inflation.

The alterations in the US interest rate cycle will be critical due to its impact on rand depreciation and therefore the risks for the inflation outlook. The US has increased the Fed funds rate by 5.00% since the start of the current interest rate cycle, while South Africa has only raised the repo rate by 4.75%, reducing the risk premium offered to investors.

The decisions of the South African Reserve Bank in the coming months will be critical for the country's economic stability. The balance between maintaining a steady interest rate and managing inflation remain a delicate task.

USD/ZAR – technical view

The USD/ZAR broke out of the bear flag highlighted previously, before trading through both the 18.40 and 18.15 downside support targets. The short term move lower has now also pushed the currency pair below the 200MA.

The break below the 200MA now considers the longer-term USD/ZAR to now be broken. The longer-term trend is now assumed as sideways, and traders might now look to trade between the levels, on breakouts or reversals.

Currently the break below 18.15 considers 17.70 the next downside support target from the move. A close above the 18.15 level might be used as a stop loss consideration for traders who are short on the downside breakout, however from current levels, new short positions would need to consider whether the risk reward assumptions for this setup is worthwhile.